Banks fees: extortionate EAR interest rate?

iantresman

Banks such as Barclays are moving away from charging an EAR Effect Annual interest Rate. eg. 19.3% and, charging a fee. See their "Changes to overdrafts and ways to avoid fees".

I'd like to calculate the equivalent EAR. So if I go overdrawn by £20 for one day, and have to pay their 75p fee, what is the equivalent interest rate? Can anyone help, and provide the equation for the calculation?

Their web page tells me that the main difference between their old charges, and the new one, is that "It will cost more if you regularly use your overdraft". I bet it will cost significantly more if I go overdrawn just once in the entire year, and it will make the loan day companies look good.

iantresman

Is this correct, it looks a little high?:

(£daily fee x 365) / (£overdrawn / 365) x 100

ie. (0.75 x 365) / (£20/354) x 100 = 499,593% EAR ?

It doesn't take into account any compound interest, and it might be that the fee is added to the overdraft?

eskbanker

If you go overdrawn by £20 for one day and have to pay 75p (i.e. 3.75%) for this, then clearly an annualised version of this figure will be massive. However, it would also be irrelevant - it would be a bit like moving from a pay-as-you-go phone to a monthly contract and then calculating that the cost per minute for one brief call per year is then thousands of pounds rather than a few pence as before....

CLAPTON

iantresman wrote: »

Is this correct, it looks a little high?:

(£daily fee x 365) / (£overdrawn / 365) x 100

ie. (0.75 x 365) / (£20/354) x 100 = 499,593% EAR ?

It doesn't take into account any compound interest, and it might be that the fee is added to the overdraft?

the uncompounded rate would be


0.75/20 *365 = 1368%

iantresman

Wouldn't the same argument apply to the old EAR interest rate charge? Although I'm charged this amount, it does not apply continuously throughout the year? I just wanted a way to compare the fee structures.

Would it make sense to do the reverse? A 20% AER charge on a £20 overdraft for one day is just £20 x 0.2 / 356 = 1p.

So a 75p charge on the same amount is 75 times more expensive?

iantresman

CLAPTON wrote: »

the uncompounded rate would be

0.75/20 *365 = 1368%

I think you're right, I took the duration into account twice. My previous estimate working from the old 20% EAR was 75 times cheaper suggesting a ballpark EAR of 20%EAR x 75 = 1500% which is close to your value.

eskbanker

iantresman wrote: »

Wouldn't the same argument apply to the old EAR interest rate charge? Although I'm charged this amount, it does not apply continuously throughout the year? I just wanted a way to compare the fee structures.

I know what you mean but I don't see how it's practical or meaningful to try to compare one figure that's directly proportional to the overdrawn amount with one that isn't. In some scenarios the new way will be better and in others the old way would be, so, even though EAR was a way of comparing one account with another if both charged under that regime (in the same way as a standardised APR comparison applies to cards), the new regime doesn't really allow a harmonised like-for-like comparison in that way. The cynic might contend that this is deliberate!